Many new small business owners aren't very familiar with business banking and having a separate bank account for your business may seem like a “nice to have” when starting out. This can seem especially true if you are a sole-proprietor who is not planning to operate under a fictitious business name (FBN), or if you aren’t really sure how much business you'll have right away. If you know you will be conducting a business under a fictitious name, then you might already be aware that you'll need a business bank account in order to accept payments made out to business name you establish.
Should I Open a Business Bank Account When Operating Under My Own Name?
You might think opening an account is something you can do once business starts picking up, however, you may want to look at the long term goals for your business and consider the benefits of establishing an account sooner rather than later.
Generally speaking, it may be a good idea to establish a bank account for your business, as it can help prevent commingling business and personal funds. Commingling funds could lead to creditors pursuing your personal assets or otherwise finding you personally liable for your business-related expenses and debts. You may be better positioned to avoid putting your personal assets on the line if you establish clear boundaries between the business and your personal accounts from the beginning.
Can a Business Bank Account Help Establish Credibility?
A business bank account may help establish credibility for your business and could go a long way in providing convenience for your customers. In order to accept credit or debit cards, your business will need merchant services, which are the accounts and the technology established to make accepting these payments more stable and secure. These services are not available with personal banking accounts. Additionally, some customers may feel more comfortable making a payment to your business name, rather than paying you directly. And once you have employees, you may be more able to entrust them with handling daily banking tasks on behalf of the business, knowing that transactions are taking place under the business name and are associated with your business bank account and not your personal account.
Is a Business Bank Account the Same as Establishing Business Credit?
A business bank account can be one of the first steps in establishing credit for your business and helping separate your personal and business credit. Many banks and larger business will reference a company's credit report when making decisions about whether or not to work with that company. If your company doesn't have a file that can be referenced, it could influence their decision. Establishing business credit could aid in building trust with other businesses and suppliers that haven't worked with your company before. An entity may not consider your business credit worthy if the business has never demonstrated a good payment history in its business credit file. Depending on your industry, you may need to demonstrate to vendors and other potential partners that the business is a sound entity. Establishing credit can be a key component in developing business relationships.
How to Choose the Best Business Bank for a Startup
Not every financial institution offers business bank accounts. Even if the bank where you hold your personal account does offer business banking, your business needs may be different from your personal needs. Comparing financial institutions and even considering banks that specialize in business banking can be an important first step in choosing a business bank account.
Benefits and fees vary from bank to bank and some banks tailor their services to meet specific industries. Many banks offer free checking accounts if there is a minimum balance maintained or if you meet a certain number of transactions on a monthly basis. Some banks even specialize in small businesses, but that doesn’t necessarily mean they will meet your unique business needs.
Most business banks are equipped to offer loans that meet the specific needs of businesses. These offerings vary and can include equipment loans, commercial real estate loans, liquid collateral and secured loans, construction and health care financing, asset-based lending, and lines of credit, to name a few.
There are other considerations besides lending that can influence your decision about which financial institution may make most sense for your business. Depending on the type of business you operate, you may need lockbox services, merchant services, cash vault services, ACH debit origination, customized reporting, or automated data delivery, as a few examples. That said, when you start your business, you may not realize you that you'll have a need for additional services, and some businesses may never need to add them. When balancing the decision between an institution dedicated to business banking along with fees and benefits, consider the services available as well.
Here is a list of questions to consider when choosing the financial institution that aligns with your business goals:
- What are the fees associated with holding an account?
- What are the benefits received with holding an account?
- Are there options for small businesses that don't charge fees for a low-level of activity or low average monthly deposits?
- Are there options to suit your needs as your business grows?
- What types of services might your business need to operate efficiently and securely?
- Does the institution offer the services your business needs and are the fee structures reasonable for the volume of transactions you anticipate?
- What type of loan options are available and is there a potential that I might need a business loan, other than a line of credit?
- Does the bank specialize in specific industries such as the industry your business is in?
- Will you need to visit a branch? Is there one close to the business?
- Will you be operating primarily by wire transfer? If so, what is the process and costs associated?
- What security measures for your online transactions does the bank have in place?
Once you find an institution that you feel meet the needs of your business, consider taking steps to develop a relationship with it.
4 Steps to Take Before Opening A Business Bank Account:
- If you are establishing a fictitious name, you will most likely file your petition with your County Clerk at the county office. In many cases, you will be required to have a statement published in a local newspaper to make public and establish your request to use that fictitious name. You will need a certified copy of your FBN to open a business banking account with the fictitious name.
- Once you have your certified copy of your FBN, in most cases, you will present it to the city to obtain your business license in the city where you plan to operate your business. You will need a certified copy of your business license to establish a business bank account.
- Next, determine if you will need an Employer Identification Number (EIN) which would establish a unique identifier assigned to your business by the IRS for tax purposes. Check with your tax advisor to determine which path is right for you and your business. Making sure you have a Dun & Bradstreet D‑U‑N‑S® Number at this point can be very helpful, as well.
- If you are operating your business under your own legal name (not a fictitious name), you will still need a business license to open your business account.
Making the decision whether or not to open a business bank account is one that can only be made my the business owner. By getting the information you need and weighing your options, you'll be better equipped to move forward with confidence. If you have any questions at all, consider consulting your business's lawyer or accountant for advice.
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